Basel III - Impact on Indian Banks

Although, under Basel II, Indian Banks are adequately capitalized well above the minimum regulatory threshold of 9% Capital Adequacy Ratio, my study has highlighted the fact that in case Basel 3 changes get implemented in India, from the stipulated date in 2012, their would be substantial reduction in the Tier I Capital of Indian Banks with the % reduction in Tier I capital as high as 25% for IDBI,Central Bank, while a reduction range of 10-15% for SBI, PNB,Bank of India, Union Bank ICICI,Kotak,Yes Bank etc.

Hence, as per new definition of Tier I being predominantly common equity less some adjustments, my conclusion is that a substantial amount of money will be raised by Commercial Banks from Equity Market in a few years.

The conclusions above are very valid and it is big concern in Banking today.

1. Banks are expected to raise significant amount of equity or eligible capital once Basel III kicks in. Given that Indian Banks were better managed than there counterparts in US/UK (that had over 50X leverage), it would be little concern, but still a worry to raise capital cheap.

2. One of the things happening is that with the new banks coming into the scene in India, with RBI granting new licenses, this should pump additional capital into the system. So, whatever lending was with 20-30 banks would spread to 40-50 banks and the CRAR would be better at same capital base. Ie instead of raising capital, banks would reduce lending, which would happen naturally as competition increases.

3. Liquidity ratios and the recent changes makes significant impact on Banking business. Besides the regulatory CRAR requirements, banks would typically want to hold sufficient cushion to withstand shocks and so although the calculations you made for additional capital due to Tier I definition changes, the requirement for capital would be significantly more as Banks was to keep extra. This will create further squeeze to capital markets.

4. With so much additional capital maintained and host of other changes, experts are predicting ROE to fall drastically to sub 10%. So, banking is no longer a great business if not managed well.

5. Increasing NPA in PSU banks means higher capital requirements, hence more capital from markets.

6. General growth in Banking business to fund mega infra / govt projects means more capital. Banks need to fund the 67,000 crore 3G auction.

To conclude, capital raising for Banking sector is inevitable.

Other Services of Interest

  • Cloud Security - Knowledge Snippets

    Riskpro presents a series of 5 articles / newsletters on cloud security. Cloud computing is attractive because it offers agility, resiliency and economy to organisations which adopt it. What is less...
  • Corporate Training Ideas - Risk Management and Compliance

    The following training options are appropriate for Banks, NBFC and small banks. • Basic fundamentals of Risk Management (half day) o Including Fraud, Reputational Risk issues also apart from...
  • Third Party Risk Management (TPRM) - Webinar

    EVENT OVERVIEW: TPRM or Third Party Risk Management is not a new concept, but something that needs to be addressed today. With Cybersecurity, Privacy issues emerging every day, often we find that...
  • Global Compliances - Free Webinar on key Global Regulations

    EVENT OVERVIEW: Riskpro India is conducting a free webinar on how to be future ready with respect to Global Compliances. Alleviate risk and strengthen your control on global compliance with this...
  • Sarbanes Oxley (SOX) Compliance - Free Webinar

    EVENT OVERVIEW: Riskpro India is conducting a free webinar on SOX (Sarbanes Oxley) Compliance which will take you through the applicability and requirements of the SOX 404 and 302 Act. The...
  • Internal Audit and IT Audit on Temporary Basis

    Due to the importance of regulatory compliances, it has become essential that companies are able to audit the business operations effectively. To meet this growing demand, Riskpro India offers...
  • India: Data Protection Services

    The EU General Data Protection Regulation (GDPR) is the most important change in data privacy regulation in 20 years. Now India has its own version of Data protection regulation that will change...
  • Fire Safety Assessments and Training

    Some of our features of Fire Safety Assessments and Training • Fire Science • The common causes of fire • Identify fire hazards • Types of fires and extinguishers • Fire...
  • Go to top